Tax Tip for June 2011
Tax Breaks are available for travelers who mix a bit of pleasure with their
business travel
Although video conferencing has made inroads in the ranks of business
travelers, there still are many situations where it's necessary to
travel away-from-home overnight for face-to-face meetings with staff,
management, or customers. Businesspeople or professional who must travel
for work reasons should keep in mind that they may be able to qualify
for a travel bargain by piggybacking a vacation onto an out-of-town
business trip. In effect, the business traveler gets free vacation
airfare if the trip is set up the right way. And if the travel is
undertaken for an employer, a properly set up reimbursement arrangement
for the business portion of the trip will be income- and
payroll-tax-free. This Tax Tip takes a closer look at how this
combination works for domestic travel, along with a review of other
business travel strategies that may yield personal savings. It doesn't
cover some of the more specialized rules, such as those that apply to
travelers in the transportation industry, or the per diem reimbursement
rules.
Deductions for trip undertaken primarily for business. A
taxpayer who mixes a bit of pleasure with business while away from home
nonetheless may deduct all of the round-trip transportation costs as
long as the trip was undertaken primarily for business reasons. The cost
of lodging plus 50% of meals while on business status is deductible.
Additionally, if the traveler is an employee reimbursed for all expenses
under an accountable plan that requires a timely accounting of the time,
place, and business purpose of the travel, plus receipts, the
reimbursement is tax-free to the traveler (but the personal portion of
the trip yields no tax benefit to the traveler).
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In effect, the 100% deduction for
the round-trip travel costs works as a kind of tax subsidy for a
personal vacation, or as a partially tax-free perk. |
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Illustration 1: Jane, a
self-employed information technology specialist, flies from the
East Coast to Los Angeles for a 5-day business trip. She takes
in three days of vacation and sight-seeing after the business
part of the trip is over. |
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Result: Because
Jane can deduct the entire air fare, part of her mini-vacation
is, in effect, subsidized by the tax break. |
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Illustration 2: The facts
are the same as in illustration (1), except that Jane is
employed by a corporation that reimburses her for the business
portion of the trip after she submits detailed records and
receipts. She pays for the personal portion of the trip (meals
and lodging during the three personal days). |
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Result: Under the
accountable plan rules, the reimbursement for the round-trip
airfare (as well as for meals and lodging while on business
status) is tax-free to Jane, and is not subject to FICA or
income tax withholding. That's true even though she took a
mini-vacation after her business trip ended. The corporation
deducts the travel costs it pays (but only 50% of the cost of
meals is deductible). |
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Illustration 3: The facts
are the same as in illustration (2), except that the corporation
reimburses Jane for the cost of the entire trip, including the
3-day mini-vacation. Result: Her cost for the
personal portion of the trip consists of the tax she pays on the
personal portion's value (hotel, meals, etc.), which must be
treated as compensation income. The corporation's deduction
consists of 50% of the meal costs while Jane is on business
travel status, 100% of the round-trip air fare, 100% of the
lodging costs while she is on travel status, and (assuming that
her entire compensation package is “reasonable”) 100% of the
cost of the mini-vacation since that was treated as compensation
paid to Jane. |
When is a trip treated as undertaken primarily for business?
There is no hard-and-fast rule. It depends on the facts and
circumstances of each case. The regs do say, however, that the way
travelers split their time between business and personal pursuits is “an
important factor.”
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Illustration 4: Fred works
in Atlanta and travels to New Orleans on business. On his way
home, he stops in Mobile to visit his parents. During the nine
days he is away from home, he spends $1,999 for travel, meals,
lodging, and other travel expenses. Had he not stopped in
Mobile, Fred would have been away from home for only six days
and his trip would have cost only $1,699. |
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Result: Fred can
deduct $1,699 for his trip, including the round-trip
transportation to and from New Orleans. The 50% deduction limit
applies to his meals while on business status. (IRS Pub. 463
(2010), p. 6) |
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Observation: As is evident
from illustration (4), the personal part of a trip need not
occur at the business destination. It can take place on the way
home from the business destination (or, for that matter, en
route to the business destination). |
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Caution: Taxpayers who
make a stop for personal reasons en route to a business location
or on the way home should be sure to keep records of what their
round-trip transportation costs would have been without the
personal stop. |
Saturday night stayovers. Although an employee's
out-of-town business chores conclude on Friday, he may extend his
business trip to take advantage of a low-priced fare requiring a
Saturday night stayover, where the savings in airfare are higher than
the costs of the weekend meals and lodging. The employee doesn't pay tax
on the reimbursement for his Saturday meal and lodging expenses. In this
case, IRS said that under a “common sense test,” payments to the
employee for the Saturday stay were deductible if a “hardheaded business
person would have incurred such expenses under like circumstances.”
When a personal day may not be a personal day. An
away-from-home business trip may straddle a weekend. For example, a
traveler may have to attend business meetings on Thursday, Friday, and
Monday. He is too far away to travel home and then come back (and
besides, the trip back and forth would cost more than staying put), so
he spends the weekend relaxing at the out-of-town location. Because he
must remain at the location for business reasons, the weekend days
(Saturday and Sunday) should under the “common sense test” be treated as
business days the expenses for which are deductible (50% of meal costs,
100% for other expenses) or excludible if the traveler is reimbursed
under an accountable plan.
Tax break for weekend travel home. A business traveler on
an extended out-of-town assignment may decide to fly home for a weekend
to be with family or friends. The cost of the weekend trip home is
deductible up to the amount the traveler would have spent on meals and
lodging at the out-of-town location. Note, however, that this rule
applies only if the traveler checks out of the out-of-town hotel before
leaving for the weekend trip home, and then re-registers. If the
traveler retains the hotel room, its cost is deductible, but the
deduction for the weekend trip home (i.e., the air fare) is limited to
what the traveler would have spent on meals during the weekend at the
out-of-town location.
Tax breaks when spouse or companion comes along. The
expenses of a spouse or other companion accompanying a traveler aren't
deductible unless (1) the spouse or other companion is an employee of
the taxpayer and travels for a bona fide business purpose, and (2) the
expenses would otherwise be deductible by the spouse or other companion.
(Code Sec. 274(m)(3)) Nevertheless, even if the spouse's or other
companion's travel expenses aren't deductible, a tax benefit may still
be salvaged from traveling together. That's because the business
traveler's deduction isn't based on 50% of the trip expenses. The
deduction is based on what it would have cost the taxpayer to travel
alone. (Rev Rul 56-168, 1956-1 CB 93) This rule can be a money saver on
accommodations. For example, where the cost of a hotel room is $200 for
one occupant and $149 for two, a taxpayer on business status may deduct
$149 per night, not $100, when he gets a room for two.
Similarly, where the taxpayer travels out of town on business via rental
car, and his spouse or other companion accompanies him for non-business
purposes, the entire cost of the rental is deductible, because the cost
would have been the same for the taxpayer even if his spouse did not
join him on the trip.
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